Tentative Board Decisions

Tentative Board decisions are provided for those interested in following the Board's deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.

Wednesday, March 8, 2017 FASB Board Meeting

Accounting for financial instruments—hedging. The Board discussed the following issues in the proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities:
  1. Should the "market yield" test in the proposed Update be retained or eliminated?
  2. Should the "last of layer" approach be incorporated into the current hedge accounting project for fair value hedges of interest rate risk of prepayable assets?
The "Market Yield" Test

The Board decided that the market yield test in the proposed Update should be excluded from the final Update. This test would have required an entity to use the total contractual coupon cash flows in determining the fair value of the hedged item attributable to interest rate risk if, at hedge inception, the market yield of the hedged item is less than the benchmark interest rate. The result of this decision is that entities would be able to choose to use the total contractual coupon cash flows or the benchmark rate component cash flows determined at hedge inception for all fair value hedges of interest rate risk.

The "Last of Layer" Approach

The Board decided to incorporate the last of layer approach into the current hedge accounting project for fair value hedges of interest rate risk of prepayable assets.

The last of layer approach would allow an entity to designate as the hedged item the last dollar amount of either of the following:
  1. A prepayable asset, such as a prepayable mortgage-backed security
  2. A closed portfolio of prepayable assets, such as residential mortgage loans.
An entity would be able to assume that if prepayments occur, they are first applicable to the portion of the prepayable asset or to a closed portfolio of prepayable assets that is not part of the designated hedged layer. On each hedge effectiveness assessment date, an entity would use its expected performance of the asset(s) to determine if the amount remaining at hedge maturity is still expected to exceed or be equal to the last of layer.

In combination with the Board's previous decisions on partial term and benchmark coupon cash flow designations, an entity also would be able to apply the "similar assets" test to the closed portfolio qualitatively and only at inception of the hedging relationship.


Consolidation reorganization and targeted improvements. The Board decided to move the guidance for "Consolidation of Entities Controlled by Contract" from Topic 810, Consolidation, to Topic 958, Not-for-Profit Entities.

The Board directed the staff to incorporate language into the reorganization of Topic 810 summarizing the application of expected and to consider developing nonauthoritative educational materials on how to interpret and apply the concept of expected in the variable interest entity (VIE) guidance.

The Board decided that an entity should apply all the forthcoming amendments retrospectively to all relevant prior periods beginning with the fiscal year in which the amendments are initially applied.

The Board decided that an entity should provide the transition disclosures required within paragraphs 250-10-50-1 through 50-2 (excluding the disclosure requirements in paragraph 250-10-50-1(b)(2)).

Next Steps

The Board directed the staff to draft a proposed Accounting Standards Update of the reorganization of Topic 810 for external review. The proposed reorganization would result in a new Topic 812 with separate Subsections for VIEs and voting interest entities, respectively.

Consolidation: targeted improvements to related party guidance for variable interest entities.

The Board decided to provide an accounting alternative to exempt private companies from having to apply the VIE guidance in Topic 810 to private companies under common control. To qualify for this alternative, the reporting entity, the common control parent, and the legal entity being evaluated for consolidation cannot be public business entities.

Application of this accounting alternative would be an accounting policy election. A private company that makes that election would apply the alternative to all legal entities and provide enhanced disclosures. The enhanced disclosures will be derived from existing VIE disclosure requirements of a reporting entity that has a variable interest in a VIE but is not the primary beneficiary.

The Board decided to remove the alternative for private company leasing arrangements under common control from the VIE guidance provided in Accounting Standards Update No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. The Board plans to ask whether there are reporting entities within the scope of that guidance that would not be permitted to apply the proposed alternative in its forthcoming proposed Update.

The Board decided that when evaluating whether a decision maker's fee is a variable interest, an indirect interest held by a decision maker in a VIE through a related party under common control would be considered on a proportional basis.

The Board decided to make the following amendments to the consolidation guidance for situations in which a related party group of commonly controlled entities holds a controlling financial interest and no single entity within the related party group has a controlling financial interest through its direct and indirect interests:
  1. Require consolidation for a related party under common control when substantially all of the activities of a VIE involve or are conducted on behalf of that related party.
  2. Provide criteria for a reporting entity to consider in determining whether a related party in a common control arrangement has a controlling financial interest in a VIE. This removes the required consolidation that exists in current GAAP at the commonly controlled entity reporting level.
Regardless of the consolidation outcome at the standalone level of the commonly controlled entities, the parent entity would continue to consolidate the VIE as, in aggregate through consolidation of its commonly controlled entities, it continues to have a controlling financial interest in the VIE.

The Board decided that an entity should apply all forthcoming amendments retrospectively to all relevant prior periods beginning with the fiscal year in which the amendments are initially applied.

The Board decided that an entity should provide the transition disclosures required within paragraphs 250-10-50-1 through 50-2 (excluding the disclosure requirements in paragraph 250-10-50-1(b)(2)).

Next Steps

The Board directed the staff to draft a proposed Accounting Standards Update incorporating the amendments above for external review.